Alfred Marshall and Leon Walras, two prominent neo-classical economic theorists, made significant contributions to contemporary economic analysis. Despite their differences in background and nationality, both Marshall and Walras were influenced by Cournot’s use of differential calculus in economics and included stability in their analysis. Along with Jevons and Menger, Walras is regarded as a founder of the Marginal Utility principle and creator of general-equilibrium analysis. In 1874, Walras published his Elements of Pure Economics while Marshall’s Principles of Economics was published in 1890. These major works exemplify the distinct approaches taken by these influential economists.
Both Marshall and Walras utilized different conventions when dealing with markets. Marshall used partial-equilibrium analysis, treating markets as quasi isolated. On the other hand, Walras developed and applied general-equilibrium analysis. However, both economists agreed on determining equilibrium price and quantity through the intersection of demand and supply functions. They did have some disagreements regarding the determinants of these functions and the intricacies of market equilibrium.
In the textbook “A History of Economic Thought and Method”, chapter 15, page 383, Marshall’s orange juice example highlights his focus on ceteris paribus assumptions. Marshall believed that the demand for orange juice depended on its price as well as the prices of substitute and complementary goods, and the preferences and income of consumers. By assuming that all other factors remain constant, Marshall aimed to isolate the market for a more thorough analysis.
In contrast, Walras had an interest in the interdependencies between markets and did not disregard the vaguely related factors that determine the price and quantity of specific goods, such as orange juice in our case. He believed that the ceteris paribus assumptions used by Marshall were improper and argued that other factors could not be considered constant. Walras and Marshall differed in their analysis partially because they focused their books on different audiences. Marshall’s audience consisted of clever business people, and therefore, in his book Principles, he outlined the tools and uses of economic analysis. On the other hand, Walras directed his book Elements towards his professional colleagues.
Marshall and Walras both employed different variables to adjust markets when they were out of equilibrium. Marshall utilized ‘quantity’ for making adjustments, while Walras considered price to be a more suitable tool. It is important to note another distinct difference between Marshall and Walras when discussing excess demand, which is stability. Marshall presented a list of alternative quantities to suppliers and demanders, enabling them to determine maximum demand prices and minimum supply prices. On the other hand, as mentioned before, Walras provided prices as options. This distinction arises from Walras’s belief that price acts as an independent variable causing a change in the dependent variable, which is quantity. Despite contradicting each other on this matter, both of them employed a negatively sloped excess-demand function to analyze issues of stability.
Although Marshall and Walras are often compared for their differences, they do share some similarities as highlighted by Hicks (Classics in Economic Thought). Cournot has had a significant influence on both Marshall and Walras, as they both read his work and learned differential calculus in economics from him. Their individual works also reflect some key principles of Cournot’s mathematical economics. Furthermore, they both believe in the concept of a well-defined equilibrium and classify markets as either in or out of equilibrium. They also define competitive equilibrium in the same way, where the market structure determines both price and price vectors.
When considering exchange equilibrium, Walras relied on two equations. The foundation of his general equilibrium analysis is based on one of these equations, which establishes the balance between demand and supply in specific markets. This is where Walras and Marshall diverge in their perspectives. Walras envisions equilibrium being achieved when demand and supply are equal at the given prices.
In relation to the previous mention, Walras utilized the concept of ‘price’ as a means of adjustment. In the given scenario, if demands and supplies are not equal, Walras believed that price would continuously change until supply and demand are in harmony. On the other hand, Marshall approached this problem of equilibrium in a different manner. Unlike Walras, Marshall’s approach was not solely based on the belief that quantity was the driving force behind the adjustment, but rather price. Marshall believed that this issue could be resolved by keeping the marginal utility of one of the commodities being exchanged constant.
Marshall approaches the use of time uniquely, with a clear definition that includes the concepts of short run and long run. In the short run, where time is limited and supply is fixed, the value of a good is determined by its demand. During this period, firms can adjust production but not plant size or capital. As a result, both supply and demand affect value. However, in the long run when plant size can be changed, the impact of supply on value depends on whether costs to scale are constant, increasing, or decreasing.
Both Walras and Marshall have contrasting perspectives on demand. Walras highlights the significance of considering multiple independent variables when examining demand functions, while criticizing Marshall’s incorrect use of marginal utility curves to explain demand curves. Additionally, their systems differ in terms of stability. Instability arises in Walras’s system when the excess-demand function has a positive slope, whereas Marshall’s system remains stable. However, if both the demand and supply curves have a positive slope, both systems exhibit regular stability. It is only when the demand and supply curves possess a negative slope that stability becomes inconsistent between the two systems.
While Walras has always been highly critical of Marshall’s work, Marshall avoided publicly criticizing Walras. Specifically, Walras criticized Marshall for displaying demand curves without considering the interdependencies of utilities and demands for all goods. However, as noted by Hick in the reader, their ultimate divergence stems more from different interests rather than techniques.
When examining their individual works, a notable difference emerges. Marshall focused on creating a mechanism that would facilitate easier application to historical or experiential problems. On the other hand, Walras was interested in inventing principles that would drive the operation of an exchange economy.
The contributions of William Stanley Jevons, Karl Menger, and Leon Walras were not simply replacing a cost theory of exchange value with utility. However, Alfred Marshall combined classical analysis with the new tools of the marginalists to explain value based on supply and demand. Marshall realized that studying economic concepts like value is difficult because of the interdependence of the economy and the various effects of time. Unlike Walras, Marshall used a partial equilibrium framework where most variables are held constant to analyze the theory of value. Marshall believed that understanding the influence of time and the interdependence of economic variables would resolve the debate on whether value is determined by production costs or utility.
